Sizing Up Small Caps

Bracing for a Power Surge

Global Power Equipment Group is on the mend after a lousy year marked by sluggish sales and operating issues. Its backlog is building, and its shares look ready to rally. A play on the rising popularity of natural gas.

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Global Power Equipment Group,
GLPW 0.5961251862891207%Global Power Equipment Group Inc.U.S.: NYSEUSD6.75
0.040.5961251862891207%
/Date(1438376520857-0500)/
Volume (Delayed 15m)
:
30700
P/E Ratio
10.299054012816601Market Cap
115897500.514984
Dividend Yield
5.333333333333333% Rev. per Employee
432914More quote details and news »GLPWinYour ValueYour ChangeShort position
sending shares of the turbine-equipment maker sharply lower in the past year. But a large order backlog and operating improvements suggest that the stock soon could climb out of its rut, and possibly rally to $20 from a recent $16.49. Add a 2.4% dividend yield, and investors could see a total return of 25% in the next 12 months.

Global Power (ticker: GLPW) isn't a familiar name on Wall Street, but the Irving, Texas–based company has a dedicated following in the power-generation industry. It is a market leader in components such as exhaust systems and filter houses for natural-gas turbines built by manufacturers such as
General ElectricGE -0.07656967840735068%General Electric Co.U.S.: NYSEUSD26.1
-0.02-0.07656967840735068%
/Date(1438376405357-0500)/
Volume (Delayed 15m)
:
22490767AFTER HOURSUSD26.09
-0.01-0.038314176245210725%
Volume (Delayed 15m)
:
P/E Ratio
581.2917594654789Market Cap
262981768687.412
Dividend Yield
3.524904214559387% Rev. per Employee
468803More quote details and news »GEinYour ValueYour ChangeShort position
(GE) and
Siemens
(SI). Global Power also provides maintenance and manages service outages at nuclear power plants owned by big utilities in the southeastern U.S.

Global Power sells parts for natural-gas turbines made by GE and Siemens, whose Berlin factory is shown above.
Rainer Jensen/Corbis

Despite these strengths, business lately has been weak. In the second half of 2012, utility customers scaled back maintenance spending amid uncertainty about their budgets due to the presidential election and fiscal-cliff concerns. Compounding the problem, operating snafus hit Global Power's manufacturing division, depressing profit margins, even as sales stayed strong.

Revenue in the first nine months of 2012 fell 9%, year over year, driven by a 14% decline in the services business. Net income from continuing operations slid 79%, contributing to a 41% decline in the shares from a March 2012 high of $28. In November, after Global Power reported quarterly results that missed analysts' earnings estimates, the stock dipped as low as $13.55.

But things aren't as bad as they seemed. The company's backlog is up 34% from the level a year ago, to $454 million, as customers have put in new orders. Profit margins could rebound, too, as operating problems recede.

Global Power is expected to report next month that it earned $9 million, or 60 cents a share, in 2012, on $459 million in revenue. Earnings could rise to 98 cents a share this year, on a 14% increase in revenue. Global Power shares trade at 14.8 times 2013 estimated earnings, after stripping out the company's $1.96 a share in net cash.

Global Power filed for bankruptcy protection in 2006, emerging in 2008 with a clean balance sheet. Since then, it has shed Deltak, a steam-engine maker responsible for sending it into bankruptcy court.

The nuclear-power-plant services business, called Williams, accounts for 63% of revenue, with the gas-turbine-products division, Braden, contributing the remainder. Roughly 80% of Global Power's services business involves providing maintenance on existing nuclear reactors. While that work can be deferred, it can't be put off forever. In the September quarter, the backlog grew by 41% from the year-earlier total, setting Global Power up for a rebound in sales.

At the Braden division, sales rose 2% in the first nine months of 2012, and 31% in the September quarter, aided by acquisitions. But the unit hit an operational snag in the third quarter, when a combination of a less profitable product mix, higher expenses on certain projects, and costs tied to the expansion of a manufacturing facility, weighed on profit margins. Gross margins in the division fell to 18.3% from 24% in the previous quarter, but likely have been rebounding since.

"What we saw in the third quarter was really a lower-margin set of orders out the door," Chief Financial Officer David Willis said in a Nov. 9 conference call. He added that he expected fourth-quarter shipments to have a "higher margin profile than what we have seen on a year-to-date basis."

Global Power Equipment Group

Recent Price

$16.49

12-Month Range

$28.98-$13.55

Market Value

$272 million

Revenue 2012E

$459 million

Net Income 2012E

$9 million

EPS 2012E

$0.60

EPS 2013E

$0.98

Adjusted P/E 2013E*

14.8

Dividend Yield

2.4%

E=Estimate. *After excluding net cash of $1.96 per share.

Sources: Bloomberg; Thomson Reuters

Robert Norfleet, who covers Global Power for BB&T Capital Markets, estimates that company-wide gross profit rose to 19.4% in the December quarter from 16.2% in the September quarter. Management has guided Wall Street to expect 17% to 18% gross margins for the full year.

Global Power expects that lower expenses, due to the absence of several nonrecurring items, will result in higher profitability this year. "We have the backlog in services to deliver year-over-year growth" in sales, Willis said.

Management couldn't be reached for comment.

GLOBAL POWER ALSO COULD have a significant opportunity for growth in the future, as the enhanced attractiveness of natural gas as a source of power-generation could usher in higher demand for its products. The low price of gas, and its clean-burning properties relative to coal, have already led it to take market share. A boom in new gas-fired plants could be on the horizon.

Global Power also is planning growth in complementary markets. In September it bought TOG Holdings, a maker of metal parts for steam and natural-gas turbines, a high-margin business. Given Global Power's strong balance sheet and ample free cash flow—$10 million is expected this year—the company should have plenty of flexibility to carry out its plans.